10/2/08

Economics

Recent Data

Weekly mortgage applications plunged 11%.

August construction spending was unchanged versus estimates of decrease of .5%

On the other hand, the September Institute for Supply Management’s manufacturing index fell to 43.5 (anything under 50.0 signifies contraction) from August reading of 49.9 and expectations of 49.5. This is one of the largest drops ever recorded in this index. The graphics:

http://econompicdata.blogspot.com/2008/10/ism-manufacturing-september-deflation.html

September auto sales were dismal:

http://bigpicture.typepad.com/comments/2008/10/auto-sales-tank.html

Other

There is still work to be done to get our Markets back to normal—like lifting the ban on short sales. This article is a little long but a great explanation of why this rule hampers the stock pricing efficiencies:

http://www.forbes.com/opinions/2008/09/30/short-selling-ban-oped-cx_mb_1001brenner.html

fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.). More of the same in the continuing resolution:

http://www.dcexaminer.com/opinion/Do-little_Congress_does_more_earmarks.html

protectionism (Free trade is a major positive for world and US economic growth.)

http://online.wsj.com/article/SB122282655321992987.html

Barry Ridholtz on the causes of the credit crisis:

http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html

He is also not very happy about the suspension of ‘mark to market’ accounting:

http://bigpicture.typepad.com/comments/2008/10/mark-to-market.html

A very simplistic look at the math of the rescue plan:

http://econompicdata.blogspot.com/2008/10/bailout-can-work-and-at-no-cost-to.html

Politics

Domestic

International War Against Radical Islam

The Market

Technical

The Averages ended yesterday basically flat with Tuesday--the DJIA remaining above its July 2008 low and the S&P below. Volume was lower than on Tuesday and the volatility index rose back to near 40. Technically speaking, this does not give me warm and fuzzy feelings about Market direction. Granted bottoms tend to be marked by a lot of volatility which we clearly have had, the absence of a final high volume puking out of stocks is bothersome to me. Perhaps we are at least getting close. Nevertheless, just to have a day of reasonably calm pin action was a nice respite.

Technically, I think stocks remain in limbo. I am waiting for the Market to point the way.

A long term chart of the volatility index (VIX):

http://bigpicture.typepad.com/comments/2008/10/vix-history.html

The SEC extends the ban on short sales:

http://calculatedrisk.blogspot.com/2008/10/sec-extends-short-selling-ban.html

Fundamental

There is a growing consensus that the rescue plan will pass; leaving aside the fact that five days and 300 Dow points ago, the consensus was that the rescue plan would pass, I am willing to concede that the probability of passage is reasonably high. If it does, I also think that the underlying fundamentals of financial institutions will improve. So it makes sense that if the plan passes, our Portfolios would be adding to their positions in the financial sector. All that said, the credit markets remain very skeptical; and by that I mean, spreads are very high and not reflective of increasing liquidity in the financial system. Let’s be sure it passes.

Chart porn on credit spreads:

http://bespokeinvest.typepad.com/bespoke/2008/10/high-yield-spre.html

Why the bill needs to pass:

http://kudlowsmoneypolitics.blogspot.com/2008/10/dr-coburn-says-financial-stabilization.html

In the meantime, investor attention is increasing focused on the shape of economic activity over the next 12-18 months; and as I mentioned last week in a Morning Call, their specific concern is with companies in the materials (commodity) and industrial sectors. Quite independent of the Averages, these stocks are being beaten like a rented mule. The good news is that our Portfolios have either already sold their entire holding in stocks in these two sectors or have pared them back to at least one half positions. But the carnage continues; so at the Market open this morning, our Portfolios will sell additional shares in these stocks.

However, because our Portfolios already have as large a cash position with which I currently feel comfortable, I want to keep their equity exposure constant. So the proceeds from the sales of materials/industrial holdings will be re-invested into shares of companies in the consumer staple and health care sectors.

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